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World Markets Review for February 2016

Market Commentary

March 2016

World Markets Review for February 2016

Global stocks produced mixed returns amid investor concerns about a slowing global economy, low oil prices and ongoing turmoil in the banking sector. U.S. shares were flat, while European and Japanese markets lost ground. Emerging markets showed signs of stabilization as some commodity prices moved higher, boosting the materials sector. Investment-grade bonds advanced on safe-haven buying, and the U.S. dollar declined against the euro and the yen.

Index Returns (Monthly)

February 2016

YTD 2016

U.S. Dollar %

Local %

U.S. Dollar %

Local %

MSCI World

–0.7

–1.5

–6.7

–6.9

MSCI EAFE

–1.8

–3.6

–8.9

–9.2

MSCI EM IMI

–0.2

0.1

–6.9

–5.4

MSCI Europe

–1.8

–1.9

–8.3

–6.7

MSCI Pacific ex Japan

–0.1

–0.9

–8.9

–7.9

S&P 500

–0.1

–0.1

–5.1

–5.1

MSCI Japan

–2.7

–9.3

–10.7

–16.2

MSCI UK

–0.9

0.9

–6.8

–1.5

Barclays Global Aggregate

2.2

—

3.1

—

Barclays U.S. Aggregate

0.7

0.7

2.1

2.1

J.P. Morgan EMBI Global

2.0

2.0

1.8

1.8

J.P. Morgan GBI EM Global Diversified

North America

U.S. stocks were flat in February following a poor start to the year as concerns about weak global economic growth weighed on equity markets. The Standard & Poor’s 500 Composite Index was nearly unchanged despite rallying during the second half of the month from a 22-month low. The Dow Jones Industrial Average increased 1% and the Nasdaq composite was 1% lower.

Six of 10 S&P sectors had positive returns. Materials and industrials posted gains of 8% and 4%, respectively, on better-than-expected industrial data and modestly higher metals prices. A takeover bid by Honeywell lifted shares of United Technologies by 11% (although Honeywell abandoned the bid in early March), while optimism surrounding the proposed merger of Dow Chemicals and DuPont sent their stocks up 16%. Utilities and telecommunication services, two of the more defensive sectors, continued to benefit from an investor flight to safety, rising 2% and 3% respectively.

Energy shares fell due to stubbornly low oil prices, which pushed several companies to reduce planned capital expenditures and cut dividends in February. Energy-related firms have seen their revenues fall substantially as U.S. oil prices remain near $30 per barrel. Apache and Transocean announced that their fourth-quarter revenues fell 53% and 17%, respectively, from the previous year.

Worries over exposure to the energy sector weighed on financials, which declined by 3%. Banks are building up loan loss reserves as low oil prices put stress on energy companies’ balance sheets. Bank of America announced that it would set aside $500 million to cover potential energy-related defaults and J.P. Morgan signaled that it would increase its reserves to $350 million.

Commodity prices were mixed. Oil prices were flat overall; WTI crude oil prices fell to a more than 12-year low in mid-February, but rallied more than 25% in 12 days on signs that major oil producers may be cutting or freezing production. Higher gold prices led to a 29% gain in shares of Newmont Mining, which said that every increase of $100 per ounce in gold prices adds $350 million to its cash flow. Copper prices rose 3% following stronger-than-expected U.S. economic data, helping to lift Freeport-McMoRan’s battered shares by 66%.

Global mergers-and-acquisitions activity through mid-February was down more than 20% compared to the same period last year. Concerns surrounding slowing Chinese economic growth, falling oil prices and the strength of the financials sector have slowed M&A activity, which set a record in 2015. Despite the global slowdown, M&A by Chinese companies targeting U.S. businesses reached a record $23 billion year to date after a $6 billion bid for Ingram Micro by Tianjin Tianhai in February.

U.S. economic data was generally positive. Employers added 151,000 new jobs in January, while retail sales, capital goods orders and industrial production data all reflected a pickup in economic activity. Housing starts and new home sales slowed, but existing home sales accelerated to a six-month high in January. Real gross domestic product growth for the fourth quarter was revised from 0.7% to 1.0% as inventory investment decreased less than previously estimated. But minutes from the January meeting of the Federal Open Market Committee revealed several members were pessimistic about additional interest rate hikes in 2016, while Federal Reserve Chair Janet Yellen suggested negative interest rates were a possibility in an economic downturn in her semiannual Congressional testimony.

As the energy sector continued to struggle, Moody’s downgraded several investment-grade companies. Southwestern Energy, Cenovus Energy and Anadarko Petroleum were among the credits that were downgraded. Among the largest offerings of the month, Apple sold $12 billion of bonds spread across nine tranches, with maturities ranging from 2 years to 30 years. The deal included $2 billion of 10-year notes with a coupon of 3.25% and $2.5 billion of 30-year bonds at 4.65%. While the company intends to use the proceeds for general corporate purposes, including stock repurchases, it also included a $1.5 billion fixed-rate tranche to be used specifically for identifying projects that would reduce the company’s impact on climate change.

Europe

European stocks fell for a third straight month amid weak economic growth and continuing turmoil in the banking sector. The deteriorating environment led to renewed calls for the European Central Bank to increase its already aggressive monetary stimulus measures. ECB President Mario Draghi suggested such a move could happen as early as the bank’s March 10 meeting. Overall, European stocks lost 2%.

Deflationary pressures intensified in February as eurozone consumer prices edged 0.2% lower, compared to a 0.3% increase the month before. The ECB is buying about €60 billion a month of mostly government bonds in a bid to boost inflation, encourage lending and stimulate economic growth, but the stimulus program appears to be having little effect so far. Economic growth in the 19-member eurozone rose just 0.3% in the fourth quarter, hurt by lower-than-expected growth in Italy.

A U.K. initiative to withdraw from the European Union also dampened investor sentiment and sent the British pound plummeting. Amid long-simmering resentment toward continental Europe, U.K. leaders scheduled a June 23 referendum to decide whether the nation should remain part of the European Union or strike out on its own. The so-called “Brexit” scenario sparked renewed worries about European stability and drove the pound down by 2% to a seven-year low against the U.S. dollar. Recent polls suggest the measure will fail, but it is expected to be a close race.

Most sectors lost ground, weighed down by a 5% decline in financial stocks. The European banking sector was particularly hard hit amid investor worries about persistently low interest rates and high exposure to troubled emerging markets. Shares of HSBC — which derives roughly 70% of its earnings from Asia — continued a months-long slide after the British bank reported a $1.3 billion loss for the fourth quarter. Meanwhile, shares of Credit Suisse tumbled after the bank reported a quarterly loss of 5.8 billion Swiss francs amid heavy outflows from its wealth management division.

Information technology and utilities stocks lost 4% and 5%, respectively, as concerns about Europe’s sluggish economy weighed on the outlook for corporate earnings. Shares of Nokia declined after the telecommunications equipment maker warned that a slowing global economy will likely hurt sales this year in “all addressable markets.” In the utilities sector, Iberdrola shares fell after the Spanish utility reported a nearly 7% drop in pretax profits, partly due to costs related to its acquisition of U.S.-based power company UIL Holdings.

Energy and materials stocks generated the best returns, rising 4% and 6%, respectively. The previously hard-hit sectors enjoyed a modest bounce amid some stabilization in global commodity prices. Shares of mining giant Glencore rallied on a 14% increase in iron ore prices and the announcement of a $7.7 billion refinancing package that largely removed concerns about the company’s ability to service its debt. In the energy sector, Royal Dutch Shell shares rose amid a modest uptick in oil prices and talk of a potential production freeze in major oil-producing regions.

In bond markets, European sovereign debt rallied on expectations that the ECB will increase its bond-buying program in March and cut interest rates further into negative territory. The ECB’s deposit rate stands at –0.30%. Amid a negative interest-rate environment and increased safe-haven buying, the yield on Germany’s benchmark 10-year note fell 21 basis points to 0.11%, its lowest level since April 2015 and close to an all-time low.

Asia-Pacific

Japanese equities lagged most developed markets amid concerns over the sharply rising yen, slowing global growth and poor domestic economic data. Japan’s economy contracted in the fourth quarter, raising speculation that more stimulus would be necessary to boost the struggling economy. The MSCI Japan Index declined 9%, while the MSCI Pacific Index sank 7%. The yen had its largest monthly gain since 2008, surging 7%.

Japan’s GDP declined 1.4%, its fourth contraction in seven quarters. Private consumption was the biggest detractor, falling 3.3% on an annualized basis. Lower exports also weighed on growth, hurt by the slowdown in China. Retail sales fell in January for the third consecutive month, further highlighting the lack of spending from consumers amid anemic wage growth and a deflationary environment. Inflation retreated 0.1% in January, while prices excluding food and energy rose 0.7%. On a positive note, Japan’s industrial output rose 3.7% in January from the previous month, the largest gain in a year and ahead of economists’ forecasts.

A sharp appreciation of the yen pressured exporters, particularly automobile manufacturers. Shares of Toyota, Honda, and Subaru-maker Fuji Heavy Industries all declined by double digits. Mazda retreated 27% after announcing diminishing profits and a recall of 2 million cars. Banking stocks have fallen sharply since the Bank of Japan moved the policy rate into negative territory at -0.1% last month. Mitsubishi UFJ and Sumitomo Mitsui shares both lost more than 20%. Nomura Holdings was also among the biggest laggards. Shares of the financial holding company plummeted after management announced third-quarter profits sank 49% and delayed its profit target goal. The telecommunication services sector was a relative bright spot, finishing flat. SoftBank and NTT Docomo both advanced after announcing large share buyback plans.

Australian equities ended 2% lower. The market was weighed down by financial stocks as the outlook for the global banking sector remained uncertain. Shares of the four megabanks all traded lower. Materials companies supported returns as the decline in commodity prices abated in February. Shares of gold miner Newcrest Mining surged 38%, benefiting from a persistently weak Australian dollar and a sharp increase in gold prices.

The MSCI Hong Kong Index was flat. Casino operator Galaxy Entertainment gained 8% as visitor traffic increased in Macau for the second consecutive month, increasing hopes that the region’s two-year gaming slump was coming to an end. Insurer AIA fell amid concerns that China may place restrictions on the buying of overseas insurance.

Emerging Markets

Emerging markets held their ground in February. The MSCI Emerging Markets Investable Market Index finished unchanged as commodity prices stabilized and central banks in Europe, Japan and China voiced support for further stimulus. The materials sector led gains, followed by energy. Health care paced declines. Meanwhile, most currencies – many of which traded at multiyear lows at the start of the year – gained modestly against the U.S. dollar. Emerging markets debt rose. U.S. dollar–denominated bonds, as measured by the J.P. Morgan EMBI Global Index, gained 2%; local currency debt, as measured by the J.P. Morgan GBI-EM Global Diversified Index, moved higher by 1.4% in dollar terms.

Chinese equities edged lower, but the selloff slowed following sharp declines earlier in the year. The MSCI China IMI fell 2% as officials took further steps to ease investor fears about monetary policy and took selective actions to help fuel economic growth. To spur bank lending and boost liquidity in the financial system, China’s central bank unveiled plans to reduce the amount of cash banks must hold as reserves. Government officials also cut home purchase taxes and further eased requirements on down payments for first-time home buyers.

Other Asian markets were mixed. The MSCI Indonesia IMI rose 6%. The country’s central bank cut interest rates for a second straight month by 25 basis points to help drive economic growth. The government also reduced reserve requirements for banks and opened up more industries to direct foreign investment. Taiwanese stocks advanced 4%, helped by gains by chip giant Taiwan Semiconductor Manufacturing. Meanwhile, the MSCI India IMI fell 8% amid fading investor confidence in the ability of Prime Minister Narendra Modi to pass key economic reforms. Concerns also grew about his administration’s ability to meet fiscal budget targets. The budget, released February 29, did alleviate some of those worries. South Korean stocks lost 3% amid sluggish exports and rising geopolitical tensions with North Korea. The country’s currency traded at a five-year low, with the won depreciating 3% against the U.S. dollar.

Brazilian stocks rose, buoyed by fresh optimism that China’s recent economic stimulus measures will rekindle China’s appetite for raw materials and help boost Brazil’s beleaguered economy and its commodity producers; China is Brazil’s biggest trading partner. The MSCI Brazil IMI climbed 6%. Struggling state-owned oil producer Petrobras also secured a $10 billion loan from China Development Bank. Investors shrugged off a downgrade of Brazil’s sovereign debt by Moody’s Investors Service, which became the last major rating agency to strip Brazil of its investment-grade status. Meanwhile, Mexican stocks rose 1%. In mid-February, Mexico’s central bank boosted its benchmark interest rate by 50 basis points to help stabilize the peso and keep inflation in check. The peso, which touched a record low against the dollar earlier this year, was unchanged against the greenback.

South African equities edged higher despite continued economic and political woes. The MSCI South Africa IMI gained 1% as beaten-down mining stocks rallied. South African Finance Minister Pravin Gordhan released his 2016 budget projections, which disappointed investors looking for bolder actions. It also sparked further squabbles within the government. Standard & Poor’s said the budget targets were in line with its forecasts. S&P kept its rating on South Africa’s debt at BBB-, its lowest investment-grade level.

In debt markets, Mexico raised €2.5 billion ($2.8 billion) in euro bonds, its second foreign debt sale this year. Government revenues have shrunk due to the slump in oil prices. Peru also tapped foreign markets with its second euro bond sale in four months, issuing €1billion ($1.1 billion) in notes.

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Terms and Definitions

A market capitalization-weighted index based on the results of approximately 500 widely held common stocks.

Dow Jones Industrial Average is a price-weighted average of 30 actively traded industrial and service-oriented blue chip stocks.

MSCI Brazil IMI is a free float- adjusted market capitalization- weighted index that is designed to measure the equity market results of Brazil.

MSCI China IMI is a free float-adjusted market capitalization- weighted index that is designed to measure the equity market results of China.

MSCI EAFE (Europe, Australasia, Far East) Index is a free float-adjusted market capitalization weighted index that is designed to measure developed equity market results, excluding the United States and Canada. Results reflect dividends net of withholding taxes.

MSCI Europe Index is a free float-adjusted market capitalization-weighted index that is designed to measure results of more than 10 developed equity markets in Europe.

MSCI Hong Kong Index is a free float-adjusted market capitalization- weighted index that is designed to measure the equity market results of Hong Kong.

MSCI India IMI is a free float- adjusted market capitalization- weighted index that is designed to track the equity market performance of Indian securities listed on the National Stock Exchange and the Bombay Stock Exchange.

MSCI Indonesia IMI is a free float-adjusted market capitalization-weighted index that is designed to measure the equity market results of Indonesia.

MSCI Japan Index is a free float-adjusted market capitalization-weighted index that is designed to measure the equity market results of Japan.

MSCI Pacific ex Japan Index is a free float-adjusted market capitalization-weighted index that is designed to measure the equity market results of the developed markets in the Pacific region, excluding Japan.

MSCI Pacific Index is a free float-adjusted market capitalization- weighted index that is designed to measure the equity market results across 5 Developed Markets countries in the Pacific region.

MSCI South Africa IMI is a free float –adjusted market capitalization-weighted index that is designed to measure the equity market results of South Africa.

MSCI Turkey IMI is a free float-adjusted market capitalization-weighted index that is designed to measure the equity market results of Turkey.

MSCI United Kingdom Index is a free float-adjusted market capitalization-weighted index that is designed to measure the equity market results of the United Kingdom.

MSCI World Index is a free float-adjusted market capitalization weighted index that is designed to measure results of more than 20 developed equity markets. Results reflect dividends net of withholding taxes.

NASDAQ is a broad-based index that measures all NASDAQ domestic- and international-based common stock listed on the NASDAQ stock market and is calculated using a market-capitalization-weighted methodology.

Represents the U.S. investment-grade fixed-rate bond market.

The J.P. Morgan Emerging Market Bond Index (EMBI) Global Diversified is a uniquely weighted emerging market debt benchmark that tracks total returns for U.S. dollar-denominated bonds issued by emerging market sovereign and quasi-sovereign entities. This index is unmanaged, and its results include reinvested dividends and/or distributions but do not reflect the effect of account fees, expenses or U.S. federal income taxes.

The J.P. Morgan Government Bond Index – Emerging Markets (GBI-EM) Global Diversified covers the universe of regularly traded, liquid fixed-rate, domestic currency emerging market government bonds to which international investors can gain exposure. This index is unmanaged, and its results include reinvested dividends and/or distributions but do not reflect the effect of account fees, expenses or U.S. federal income taxes.